The Impact of Unemployment on Economic Growth in Sri Lanka: An ARDL Approach

Abstract

This study examines the impact of unemployment on economic growth in Sri Lanka using annual time series data from 1991 to 2023, sourced from the Central Bank of Sri Lanka, Department of Census and Statistics, World Bank, and other credible institutions. Key variables include the unemployment rate, GDP growth, foreign direct investment, gross fixed capital formation, political stability, and inflation. Employing the Autoregressive Distributed Lag (ARDL) bounds testing approach, the analysis identifies a significant long run relationship between unemployment and economic growth, underscoring the complexities of Sri Lanka’s “jobless growth” phenomena. Despite periods of economic expansion, unemployment rates have remained persistently high, with youth unemployment exceeding 23% in recent years, highlighting structural challenges in translating growth into job creation. The findings reveal that high unemployment adversely affects investment, productivity, and consumer spending, hindering sustainable economic growth while exacerbating poverty and social inequality. This research contributes to the literature by contextualizing Okun’s Law within the Sri Lankan economy, providing empirical evidence on the inverse relationship between unemployment and GDP growth, while recognizing variations arising from local policy and labour market dynamics. The study recommends targeted policy interventions to enhance workforce skills, improve labour market flexibility, and foster an enabling environment for private sector-led job creation. By addressing the structural drivers of unemployment, Sri Lanka can mitigate the adverse impacts on economic growth and achieve inclusive, sustainable development. These insights are valuable for policymakers seeking to design effective employment and economic policies to reduce unemployment and stimulate economic growth, ultimately contributing to the country’s social stability and economic resilience.